How health-care reform could discourage Americans from working

July 14, 2013

Starting next year, the Affordable Care Act will create individual health-insurance exchanges in each state. That will make it easier for people to buy insurance on their own and, as a result, will weaken the longstanding link in the United States—unique among industrialized countries—between having health-care coverage and holding a job.

But the federal law could also prompt nearly one million people nationwide to drop out of the workforce, according to new research from Matthew J. Notowidigdo,Neubauer Family Assistant Professor of Economics at Chicago Booth.

The study, written in collaboration with colleagues at the Kellogg School of Management and Columbia’s Mailman School of Public Health, looks at employment in Tennessee following the largest reduction of Medicaid eligibility in US history. In 2005, about 170,000 Tennessee residents—roughly 4 percent of the state’s nonelderly, adult population—abruptly lost their health-insurance coverage, after then-Governor Phil Bredesen rolled back a previous expansion of Medicaid. Notowidigdo, Kellogg’s Craig Garthwaite, and Columbia’s Tal Gross wanted to know how likely those residents were to get a job offering private health insurance to replace the lost public coverage.

Using data from the Census Bureau’s Current Population Survey, and comparing Tennessee to other Southern states, they find distinct shifts in people’s behavior following the Medicaid rollback. The policy change caused a 6 percent boost to employment in Tennessee over two years. The increase primarily came from those who were out of the labor force entirely, not those who were merely unemployed. Almost all the new jobs had working weeks of more than 20 hours—making the workers likely to get private health insurance through their employers.

In fact, the insurance rollback had such a dramatic effect on employment patterns that, without it, average wages would have had to have increased by approximately 26 percent to prompt the same number of adults to enter the workforce, according to the research.

The study finds a large increase in employer-provided health-care coverage in Tennessee after the Medicaid changes, “suggesting that public health insurance had been ‘crowding out’ private health insurance,” the researchers write. Childless adults were especially likely to report such a switch to private insurance.

Using Google Trends, the researchers also show a spikeamong people in Tennessee searching the phrase “job openings” at the same time that the Medicaid recipients were being removed from the health-insurance rolls.

While Notowidigdo, Garthwaite, and Gross caution that the effect of Tennessee residents losing Medicaid eligibility may not be exactly comparable to the effect of Americans gaining health-insurance coverage under the Affordable Care Act, they note that both primarily target the same demographic group: low-income adults without children. If the pattern from Tennessee were to hold, the federal law could prompt 530,000­­­–940,000 people to choose to leave their jobs, reducing the overall US employment rate by 0.3–0.6 percentage points.

The Affordable Care Act will test the strength of “employment lock,” the term the researchers use for how some American workers hang onto their jobs solely for the health benefits. Under the law, low-income people will get large subsidies to help offset the cost of coverage, and Medicaid will expand dramatically.

The study could help policymakers determine the optimal eligibility requirements for public health insurance—broad enough to cover people who are shut out of the private marketplace because of income or other issues, but restrictive enough to exclude those who could get insurance on their own.